Fee Trends Not Always What You Think
Posted: July 12th, 2010 | Author: James P. Cramer | Filed under: Best Practices, Economy, Leadership, Professional practice, Strategy | Tags: benchmark, DesignIntelligence, fees, negotiation, professional service firms |“Recent interviews and fee negotiations have convinced me that it is a race to the bottom on fees,” a client just told me during a phone conversation. I know this is a very real feeling among many in the design professions. The truth is that it is increasingly common for professional practices to lower their fees to get scarce work. While it is a legitimate business model used to survive the economy, it is not fun. It is often not sustainable, either.
Regrettable quality problems often follow these hastily put together fee models. There are limits to how low fees can go and still serve clients’ needs responsibly. The good news is that there are tools and attitudes to adopt when you find yourself in this situation.
One of the DesignIntelligence benchmarks in real-time productivity, for example, measures best practice revenues per full-time staff. It is currently in the $172,000 range. But some firms are getting that number today. Others are still hovering around $100,000. The difference is in categorical commodity services provided by firms that range from high to low.
Those at the lower ends are feeling more squeezed and threatened. They know that it is difficult to deliver quality results to clients without resources. Moreover, it is common for firm partners to settle on low fees before negotiating tangible benefits to clients. There is measurable value in such overt services as schedule acceleration and reduced risk of project delay, optimal construction sequencing, and reduction in errors resulting in unbudgeted change costs.
The irony here is that fee trends are not always led by clients. Too often it is the practice leaders who panic and forget the value of their services, their brand, and their long-term measurable benefit.
We recently pursued a project for which we were the undisputed front-runners, according to the client. We had intimate knowledge of the organization, and the interview was more of a “how do we begin” rather than “what can you do for us.”
Unfortunately, two of our competitors undercut us, one by 2/3 and the other by 1/2. Perhaps it was because they knew we had the inside track; possibly it was because they have stripped their in-house staffs to zero and are now contracting designers desperate for work. Maybe they’re undercutting scope in order to make up the difference in change orders.
We can’t know this for sure; all we know is that given the choice between the best firm and the lowest price, our client chose the latter. This is one instance where the trend was ultimately acted upon by the client, but the competition instigated the race to the bottom. Given the cost difference and what was promised, I can hardly blame the client; they are simply trusting that these firms are telling the truth.
For the client’s sake, I hope they’re right.
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There is a lot of discussion in many of the cities we’ve visited recently about the “brand erosion” being witnessed as some of the top firms are aggressively cutting fees to win jobs in market sectors where they would not normally go.
Buried further in this practice is the professional erosion that takes place as the client’s experience naturally suffers as a result of the inevitable squeeze on attention as project managers, engaged in places they do not want to be, try unsuccessfully to balance commitment with fees.
Clients in these markets learn not only that fees can be much lower than they have traditionally been, but also know that they’ll squeeze fees further next time around since the experience of inattentive service is not worth it.
I think I’ve seen the trend referred to as “oiling the guillotine” (after the condemned architect who, with his neck on the block, helps the executioner solve the problem of the stuck blade).
[...] fees reinforce lower fees July 14, 2010 // 0 Somewhat related to an earlier post was this article in the Design Intelligence blog about the trend in cutting design fees in a tough economy. We [...]
What you are experiencing is called “liaise fair capitalism” and “free market competition.” This is basis of the U.S. economy, and is what has created the high standard of living that you enjoy. It is being slowly eroded by protectionism and socialism, and along with it will go your high standard of living.
Mr. VanderKlipp suggested that the client chose the cheaper rather than the better firm, but in fact he/she did choose the better firm. Every purchase is based on value and value has both quality and cost components. It is the combination of these two components which determine the “best” choice.
The subject that should be discussed here is the criteria used by the client to evaluate the purchase. The client is not an informed buyer, and that is the problem. When the economy is good, this information disparity works in the favor of design firms, but when economy is bad, it is really bad.
“Liassez faire.” Sorry, apparently MSWord does not have this phrase in its dictionary. Perhaps this is an indication of the problem with our society as well.
You can’t blame the client for wanting to cut fees and markups. I do blame the professional organizations we all pay fees to for not protecting the designers who have degrees, diplomas and CEU hours to back up their fee structure. When a client sees a Nate Berkus or a HGTV design star they have no clue that you can’t be a designer without the education. Just like you assume a doctor or dentist is really a doctor or dentist, clients just assume all designers are created the same and we are not. Lets back up the laws in place with action.
Michael Moore
MJM DESIGN GROUP
I completely agree. Until potential clients even know what ASID means, how can they evaluate designers? As an industry, this needs to be our #1 priority. Clients need to be educated on what they can expect. In addition to know that the designer is actually educated and qualified, they have a right to at least an estimate of what they are going to be spending. I often have to explain to clients that they hourly rate is a meaningless tool for comparison without an estimate of the total fee. I would fee a lot better about paying my professional dues if there were more progress on this front.
I’ve been on a wonderful vacation for the last week in Wisconsin, Minnesota and South Dakota. We were fortunate to have great weather and to have time to gather and catch up informally with both clients (friends) and family. One of my clients noticed that I had a new Ipad with me and asked what I have downloaded and how I liked the product. I showed him the bookshelf loaded with new titles that I was looking forward to reading. He suggested that I add Drive by Dan Pink (one of our DFC Fellows and a book that I love) and a somewhat surprising suggestion: Think and Grow Rich by Napolian Hill. I followed his advise and read the book through last Sunday during our drive from Watertown South Dakota to the Twin Cities. There is much in this book that is relevant to our discussion on fee strategy and recessions. I suspect most of our DFC members have read the book in the past (most likely distant past) but nevertheless I’m now recommending that you pick it up, dust it off, and read it again. It will give you a boost and help you to be a bit sharper as you face the uncertainty of our time. You will see that there are market opportunities for the wise — at a variety of professional fee levels and their corresponding services. A good reminder about innovation and courage.
Michael Moore’s observation struck a note with me.
The impact of false “reality” design shows about design has misled the public greatly, especially in the residential design industries. I cringe every time I see one of these TV fantasy played out.
The project is designed in 2 minutes after a 2 minute programming meeting and executed in 4 days while the client goes to see Mom and Dad (who needs permits or competitive construction pricing right?).
Of course the budgets presented as limitations to meet only include product and material costs…hmmm?
But really, these shows damage only a small percentage of potential clients.
Our studio has been around for almost 22 years and we have spent most of that time tweaking how to be as leaner and leaner yet provide the most comprehensive and value added design services possible and I believe we still do so. Yet, opps, here comes the “new economy” and we now find ourselves being underbid by the overhead heavy multinational corporate architecture and design factories going after 2,000 sf projects, which was initially astonishing, but not surprising really.
This self distructive sell out we are experiencing in our profession and in general is the result of the stupidity over the last 30 years of deregulation in the name of capitalism (so effectively confused by everyone with democracy).
Like it or not, a free market economy is now about survival and who holds the money. I am the last person to want to see professionals undercut each other and devaluate our industry but unfortunately that is what the “readjustment” of a false economy is forcing. Everyone, even the most seasoned and experienced design professional and most every client is a part of this process.
Some approach this change ethically and as a challenge like everything else, while others will step on each other and scratch and claw to survive. It’s human nature and a result of fear.
I watch my clients across the desk shake in fear for their own jobs discussing fees and budgets fairly consistently. I usually can tell when they are play acting or being honest with us. The bottom line is everyone is a part of this process and if you will, part of the blame.
Recession? That is a kind description for the failure of our current unsustainable system. The fallout of the pending economic change still coming and I am not being cynical, just moving forward with my eyes open.
In all this how does the design professional maintain value, fee and more importantly ethics? I think it’s time to stop the fear and share the information. Stop holding your cards so close. We are all in this together and need to educate everyone, including our clients, and each other, and stop making what we do a mystery. Demand that our clients be honest about their budgets, and be just as honest about what that will buy them and how together you can make it work. It is just one idea, and unless you are old enough to have survived the great depression, most of us are in new territory here.
Maybe we can get HDTV or Bravo to produce series of programs that actually expose the process of real design and the actual fee and execution costs as part of a complete architectural project presentation. Think about it, these networks would have to spend less time and money editing a dull process and hiring writers to dramatize the storyline as it is already quite dramatic and would last forever…but then would anyone believe it?
It continues to amaze me how people can take a protectionist stand when it comes to their own station in the industrial complex, and with the same breath condemn others protectionist ideals. I guess it always depends on where you reside.
Protectionism is protectionism, no matter who practices or promotes it. If you want a free market that rewards those who perform and does not reward those who would rather legislate than perform, then you must adopt this policy uniformly, even as it relates to your own industry (profession). It is an ideal on which our free market society was conceived by the founding fathers. Democracy is indeed different than free market economics. Deregulation, which has incidentally not the trend for thirty years, but actually only for about eight years during the Reagan era, was an ideological attempt to return to a free market, which had eroded during the very liberal period of the late 70’s and early 80’s which was a backlash against the Nixon years.
Passing laws that force clients to do things, no matter what those things are, is protectionism and regulation. A free market requires the service or product demonstrate value to a would be consumer in order to convince them to purchase the good or service, and requires that the market price dictate the monetary value of that product. Anything other than that, interceded by acts of government, is protectionism.
If you want to survive in a free market society, you have to adjust your product to meet the needs of a client base. Create a product that demonstrates value. You cannot continue to try to force the product that you want to produce onto an uninterested client base, or to pass laws that force them to buy it. Hello!
No one owes you anything — not the state registration laws, not the government, not the economy, not your employer, not your parents. You must invent your own sustainable future and be an entrepreneur of your life. This is design entrepreneurship and it is especially rewarding during this time of chaos and change. Take advantage of the infinite possibilities now available to you in a world of constant flow. Give some thought to competitive fitness and mix fees into your value proposition. There are some interesting combinations.
Come on down folks… the water is fine in the bargain basement of fees!
I openly encourage my clients to seek out other Architects and to shop on price. ‘Go for it!’ I tell them. If you find someone cheaper… and you like them… give them a try.
They hardly ever do… too busy too lazy… or they have tried and haven’t found anyone that can beat my fees. I have yet, since 2002, lost a project to a lower fee.
You see… I’m already at the bottom. This fits with my project types, and while we provide good service and reasonable design, no one would confuse one of our projects with that of a ‘top ten’ firm. Or a top 100 firm for that matter.
In doing so we have gotten more productive… and this extends across everything we do, but really has hit hard in the MEP engineering area… we now have a team of engineers that are far below the local market rate and this helps quite a bit in keeping our fees low. Plus with them working that much harder to keep their time down we find that things move quicker and more efficiently than before. No major design ‘dust ups’ no ‘back and forth’ on co-ordination issues they know going in just what they have to do, and how we want them to do it.
My recognizing and understanding and embracing that we are the low cost leader we now profit on almost every project. This allows us to keep with our repeat clients and working through the local word of mouth become known as ‘the affordable (cheap!) Architect.’ I love phone calls that start with some variation on ‘we have this new location we want to do, we have been talking with Architects, but we think we can afford one.’ My kind of client.
So come on down… there is plenty of work at the low end of things!
If you’re doing better than me and with lower fees, you’re better. Either I get better or lower my fees. I try to position myself in the “value-added” axis and my clients believe me and understand that I am able to provide better solutions for reasonable fees.
Having started a creative design practice many years ago from nothing without loans or financial investors; having designed a business model that continues to defy conventional definition and adapt to change; having successfully survived 2009 and to still be practicing; and now approaching 55 and having practiced through more than one recession prior to this current economic mess, I would not so modestly say I have a fairly good idea of the hard work, personal responsibility, creativity and flexibility it takes to understand what is possible in this country as an entrepreneur and the problems that have resulted from our current economic situation.
I have always been financially conservative, and responsible, and respectful of what our previous generations created for us and unfortunately many have now squandered in the name of profit as a sole motivator.
That said I believe what most design professionals following this blog have also in fact not been foolish, lavish or feel expectations of selfish entitlement. They are just working hard to maintain competitive fees AND creative standards of design. For anyone with long term experience these are unprecedented economic times and text book business pragmatism nor previous economic cycles do little to inform those of us old enough to know better.
I profess no interests in regulating fee structures paid by clients thru legislation nor am I expressing any demands from the point of view of entitlement for myself based on my personal history or investment of time and money into my business. In fact, I truly believe that we who are still surviving owe those who established the design profession before us, those struggling now at no fault of their own, and those who just finishing their design education ready to enter the design industry, the continued commitment to maintain of high standards of professional practice and demand an ethical business environment within which to continue to practice, change and develop new ways of providing services. Ironically in today’s environment that sounds like innovative thinking and crazy talk.
To share some ideas about how to deal with low fees and unrealistic client expectations, I suggest we start by being truly frank and direct with our clients, work to practice with complete transparency, clarity and ethics; that we work to earn client trust and raise their expectations accordingly.
Outline the truths of return on investment for clients versus presenting the hollow marketing/pr speak so common with many firms now that appears to have little real content or substance in application or follow once a contract is secure.
Drop process formalities that bottle neck short term schedule turnarounds and involve yourself in clients efforts to restart THEIR businesses as an ally and as your services will ultimately impact, by design; become an advocate of not only for their patronage, but their own processes and bottom lines.
Most of us know how to do this as we know what it takes to do what we do. And this is the key to not only start the education process for establishing appropriate fees based on the value of work but to work with clients to refashion what we do and how we provide our services, and how we define our roles in the profession and the greater business environment.
Watch out for your clients and their needs and they will do the same for you and everyone benefits as a result. You may also end up with some life long friends and advocates of your work, thus supporting quality referrals from quality clients. Like any good, sincere relationship it is actually common sense and not something found in text books but in trust and honesty.
You will be surprised how much faster, easier, effective, appreciated and efficient your design processes will become and thus lower your billable time yet support better more comprehensive and custom tailored outcomes for and with your clients.
We can not only transform ourselves to adapt to current fees, but also help prevent fee devaluation itself by our clients and by our fellow practitioners.
Again, it all starts with sharing information and not being afraid to maintain ethical standards of expectations of ourselves, our fellow practitioners and our clients. Clients who trust you open up to share more important information that then allows you to be more strategic and efficient while nailing solutions more quickly.
And as you say Alan, if you want to survive in a free market society, you have to adjust your thinking.
Another suggestion is that architects and designers need to realize their power in this economy lies in the realization that they provide a unique creative process that by it’s very nature can adapt to changing needs, project types and unique solutions tailored to our individual clients. It is time to to seriously flex our creative muscles and look beyond specialization and start to share and cross discipline our practices and blur the lines between ourselves, our venders and supporting professionals and our clients. It has been a hallmark of our studio process for the last 22 years and now appears to be one of our most valuable assets in the new economy for our own survival and that of many of our clients.
Finally, if there is any way to demonstrate value, hold fee standards and maintain satisfied clients, it is to go well beyond their expectations with services and solutions so unexpected and client enhancing that they stop viewing the end result as a product, but something much more valuable and worth paying appropriate fees to procure.
PS: (as I just can’t resist) Protectionism? Explain that to an airline employee during a flight emergency or a front line police officer who is standing between your staff and an angry client with a gun. I am sure either professional would willingly share their thoughts regarding the value their services and related fees, once you were out of danger, of course. But then I digress.
An inspiring soliloquy that needs no response. But I do not understand your point regarding protectionism. Perhaps you could elaborate, and don’t resist, debate is what leads to learning.
While “productivity” is usually measured, as Jim suggests, as “practice revenues per FT staff”, and some clients measure an architect’s value by fees the clients pay, I wonder if our use of the former has ill equipped us to deal with the latter.
Productivity, after all, is really enhanced when firms pay as little as possible for labor. Why, then, should clients not do the same?
I thus worry about our definition of productivity, and the oft hidden value inherent in the services clients pay fees to obtain.
Where do we measure and value, in addition to Jim’s citing of speed of project delivery, construction sequencing, and reduced errors, 1) how the project responds to the client’s program and enhances their value to their customers/clients; 2) the environmental and economic impact of design decisions about materials, components and systems; 3) related to the first two, the life cycle value of good design in optimizing client/user performance and minimizing costs; 4) the learning that is acquired and retained by all parties in a well designed client/architect relationship; 5) if not addressed in the program response, the real and felt senses (and value) of safety, security, satisfaction and even delight for users of the completed project?
In recent times we have fallen prey to the belief that all things valuable must be measurable in dollars (most of the above can be so measured, it is true). There was a time when architects were also retained for their passion, enthusiasm, creativity, altruism, commitment, and their inspired ability to solve the thorniest problem; I hope we together may re-create that time.
I agree with Jim that “(fee) trends are not always led by clients…”. It is up to each of use to demonstrate in our communities the unique value that architects bring to optimizing the lives of our clients, and of our fellow citizens.
That is such a good point Lou and it takes this discussion deeper into new practice model consideration. Firms can navigate today’s shifting market dynamics and influence choice by using fees — but there are other options. Powerful options. You can fight fiercely for relevance against all innovative competitive threats. We should rethink economic models of professional practice in light of the new efficiencies and connectivity levels. Could this lead to a new transformative force? Beyond contractor led design-build?
One of the greatest problems with the profession of architecture is that most of us are great “generalists.”
Practicing architecture competently within only one or two related building types is difficult enough, but many architects and architecture firms attempt to practice within many more than they can really be competent in.
Community based firms often market their firm within their community for all building types, regardless of whether they are building fire stations, schools, hospitals, strip malls or whatever; and they essentially apply the same business processes to each. Other firms are regional or national, and have studios set up to serve different typologies, and still these firms apply essentially the same business processes. There is no single process that universally applies, and there is no such thing as an architect that can be reasonably competent in all of them.
Marketing firms in this manner is exploitative of the relative naivety of clients, who may not realize that a specialized firm could serve them much better.
It is easy to forget the variety of technical complexity between building types, and to try to market a firm based on an identifiable branded aesthetic, or to use a principal’s status within the community to win commissions when the firm is really not as competent as they should be in a particular building type.
Of course, business is very competitive, so it is hard to blame firm principals for taking work where they can get it, but we reap what we sow, and this concept contributes to client’s misperceptions about the value of technical competence and building-type-specific problem solving skills.
In relation to Mr. Cramer’s comments about a new transformative force, perhaps we should consider that there may be a need for multiple new business models beyond and including contractor lead design-build, which is a viable method in many circumstances, but not all.
Passion, enthusiasm, creativity, altruism, commitment, and ability to solve a problem may all be good reasons to employ a specific architect, but you have left out the greatest attribute, and that is competence.
LOVED reading this tonight (on Friday). Actuall kept the T.V. off this whole time!
While some was quiet dep in thought, it was very informative and is making me think about my business and how I should move forward. Thanks to all of you (above) who have taken the time to discuss these issues. I hope it will help others out there like me!
~Regards, Margaret
I would like to thank everyone for participating in this discussion on fee trends. You have challenged conventional thinking and you have shed new light on the subject. I will be taking your thoughts with me to my presentations in the next few weeks to professionals in Georgia, Illinois, and Minnesota. Thank you for sharing and innovating in this controversial zone of practice.